CARES Act - Look Here First for Financing: Coronavirus Aid, Relief and Economic Security (CARES) Act

Relief for Small Businesses

The federal CARES Act, if enacted in its current form1, would contain several provisions which are intended to provide assistance and resources for small businesses impacted by the current crisis, and to incentivize small businesses not to furlough their employees. A copy of the current legislation can be found here – the small business provisions are located in Division A, Title I – Keeping American Workers Paid and Employed Act.

Loan Program

  • The CARES Act would provide direct relief to qualified small businesses through a loan program that provides very favorable terms to small business owners, with substantial portions of the loans being forgiven to the extent that employers maintain their payroll levels.
  • This is an expansion of the existing 7(a) Loan Program, which is the SBA’s primary program for providing financial assistance to small businesses. The 7(a) Loan Program would now have an authorization level of $349 billion through June 30, 2020.
  • Before you look for or take private financing to avoid furloughing your employees, you should check your eligibility for the very favorable terms for small business loans under the CARES Act.
  • If you have already taken steps to furlough employees, this loan program could enable you to bring employees back to work, as the program uses historical employee/payroll levels to determine the maximum loan amount.
  • Key Terms:
  • You are eligible if you have 500 or fewer workers (full time or part time).
  • You do not need to certify that you are unable to get credit elsewhere, but you must not have applied for or received another SBA loan to keep from furloughing employees during the period of February 15, 2020 to June 30, 2020.
  • The loans are non-recourse to any shareholder, member or partner, and require no personal guarantee.
  • The loans must be used for the broad purposes of paying payroll, rent, employee benefits, utilities and interest on pre-existing debt.
  • The loans can be for 2.5 times your average total monthly payroll over the prior 1-year period, with a limit of $10 million.2
  • The term of the loans is ten (10) years.
  • The interest rate cannot exceed 4.0%, and interest payments are deferred for one year.
  • There is no prepayment penalty.
  • The loans would be made through banks and other lenders, and the new act contains measures designed to expedite the approval and funding process.

Loan Forgiveness

  • The CARES Act, if enacted in its current form, would also provide for loan forgiveness of these small business loans, with the amount forgiven decreasing as borrowers furlough or lower compensation of their employees.
  • Key Terms:
  • The loan amounts eligible to be forgiven are the sum of the following expenses of the small business paid during the 8 weeks after the origination of the loan:
  • Payroll costs;
  • Interest on a covered mortgage obligation (but not on any other debt);
  • A covered rental obligations; and
  • Any covered utility payments.
  • “Covered” means the obligation (mortgage, rent or utility payments) was in force before February 15, 2020.
  • The amount of eligible loan forgiveness is reduced as follows:
  • The overall amount is reduced by a fraction equal to (i) the average number of employees during the 8 weeks after the loan is originated, divided by (ii) the number of employees in the pre-COVID-19 period, i.e., 20% less employees equals a 20% reduction in the overall amount forgiven, and
  • Less the amount of a compensation decrease of more than 25% for any employee making less than $100,000 during the 8 weeks following loan origination.
  • The amount of the loan that is forgiven does not count as gross income to the employer.
  • The small business must submit documentation of payroll and expenses for 2019 and 2020 to the lending institution. The SBA would reimburse the lending institution for the amounts of the forgiven loans.

Other Provisions – The CARES Act, if enacted in its current form, would also provide for several additional relief measures for small businesses, including:

  • Entrepreneurial Development: Authorizes $265 million for federal grants to small business development centers and women’s business centers for the purposes of providing counseling, training and advising on SBA resources and ways to counteract the effects of COVID-19 on small businesses.
  • Minority Business Agency: Authorizes $10 million for grants to Minority Business Centers for the purposes of providing, counseling, training and advising on federal resources and business response to COVID-19 for small businesses.


1The CARES Act was approved by the Senate on March 25, 2020. The House has not voted yet but is likely to pass the legislation on or about March 27, 2020.

2Due to imprecise drafting, there is some confusion over whether the maximum loan amount is 2.5X one month of payroll, or 2.5X the last 12 months of payroll. However, we believe it is 2.5X one month of payroll, which is also consistent with the short-term relief nature of the bill.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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